MGAs face tough renewals as COVID impact felt

Hardening rates and the impact of COVID-19 will put pressure on the smaller and poorer performing Managing General Agents (MGAs) in the months to come.

Global law firm Clyde & Co’s latest survey of the MGA market, carried out with more than 100 insurers and MGAs, reveals that the MGA market remains positive in mood, with strong MGAs seeing upside even among the challenges posed by COVID-19.

According to the firm’s report, Proceeding with caution, while carriers and MGAs are overwhelmingly in agreement that setting up a new MGA will be harder this year, two-thirds of carriers and MGAs think the number of relationships will hold steady or increase in 2020’s renewals season, even in a hardening market.

It is however, seeing greater polarisation between those MGAs that will thrive and those who will struggle in the months to come and heading into 2021 when capacity providers look to their ongoing participation.

The research looked specifically at the impact of COVID-19, and on balance opinion was positive on how the pandemic would affect capacity. Just over half (51%) of carriers felt the impact would be neutral or positive. Although MGAs were split, many commented that any negative impact was likely to be short term.

The impact of COVID-19 on the MGA market, as in so many sectors, can be viewed as binary.

Jennette Newman, Partner at Clyde & Co said: “Our research suggests that good MGA players will do better. They have read the mood of Lloyd’s reform, they have their house in order, they ‘own’ their niche and can deliver for brokers who can’t now always get the underwriters’ attention. Big MGAs will also see an opportunity to increase capacity and accelerate growth. But the smaller players, those with poor claims records or high expense ratios, may struggle to demonstrate their value.

“As we approach the 1 January renewal, this may translate into challenges renewing capacity, because carriers’ newfound caution cuts two ways – not just in the business they underwrite, but also in extending their paper to MGAs.”

For carriers, the ability to hold ‘risky business’ at arms’ length via an MGA binder agreement is more obvious than ever, but Clyde said it must be balanced by tightly controlled costs.

Perhaps unsurprisingly, for carriers the focus is very much on efficient access to new markets and on technical insight and capability. The research found MGAs need to add value by opening up new opportunities rather than simply amplifying existing carrier competencies. Strong performers that can add value in niche markets are valued highly.  Technology is an important element of this and 96% of carriers and 84% of MGAs believe the shift to electronic placement and data standardisation will accelerate as a result of COVID-19.

“In a world where regulation is only increasing, excellent risk management and a strong conduct record have also grown rapidly in importance,” said the report. “Carriers have three ‘top asks’ of MGAs cited by over 50% of our sample: access, insight and conduct.”

“It is clear that carriers have borne the brunt of the claims and reputational impact of COVID-19, and this has impacted their appetite for new business,” explained Ms Newman. “Their focus has been on renewals and blue-chip ‘secure’ business. But with carriers losing appetite for anything but standard renewals, bright MGAs have seen an opportunity. They report that they are receiving more enquiries and writing more new business and they are continuing to capitalise on their ability to be responsive to brokers in a market where many carriers have become more cautious.”

While the London company market remains the preferred option for developing MGA business, overall, there is support for Lloyd’s Blueprint One initiative among MGAs according to the research. Half the MGAs said they remain positive about its impact on the MGA market while Carriers’ support is more muted with 41% positive. While red tape is held up as one concern, with MGAs (89%) and carriers (82%) both strongly believing there will be more legal and regulatory scrutiny over MGA businesses as part of Blueprint One. MGAs (75%) and carriers (82%) are both positive that Blueprint One will help drive progress towards standardising application and compliance processes at Lloyd’s.

Ms Newman said: “This has been an extraordinary year in which the appeal of Lloyd’s as a market for MGA business has been impacted by COVID-19 in addition to the market reforms focused on profitability, cost reduction and enhanced underwriting discipline. However, our research demonstrates that MGAs remain a popular and efficient business model and we anticipate that appetite to operate within Lloyd’s will return longer term as the reforms bed in and softer market conditions return.”

“Our survey shows that while the overwhelming majority of carriers and MGAs agree there will be more competition for capacity and a real flight to quality, they do not see the volume of capacity or the number of partnerships diminishing. In fact, broadly two thirds of MGAs and carriers believe relationships will hold steady or even increase and over half of carriers believe the impact of COVID-19 will be neutral or even positive for MGA capacity.”